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The German Federal Supreme Court affirms general terms and conditions of credit institutions submitting its customers immediately to execution proceedings – however, it aggravates the enforcement

12 April 2010

Mayer Brown Legal Update

In a current decision the German Federal Supreme Court (Bundesgerichtshof, BGH) has affirmed that also after credit sales the enforcement of payment claims based upon general terms and conditions submitting borrowers immediately to enforcement proceedings is permissible. However, as a further consequence of the decision the enforcement could be delayed. Prior to granting the so called execution clause (Vollstreckungsklausel), which is required to initiate enforcement proceedings, it must now be examined whether the new creditor has entered into the security agreement. The decision dated March 30, 2010 (Case No. XI ZR 200/09) has not yet been published. However, several aspects of the decision can only be assessed by means of the entire decision; only then will the decision’s full effects on credit trading become apparent. We will keep you informed.

Facts

In 1989 a borrower had granted a land charge to its house bank in order to secure a certain loan. The General Terms and Conditions of the bank submitted the company immediately to execution proceedings into the mortgaged property, i.e. the bank could initiate execution proceedings without previously obtaining a judgment against the borrower in court proceedings. In 2002 the bank terminated the loan because the borrower was in delay with his payment obligations. In the following the non performing loan was sold several times. In 2007 the defendant was entered into the land register as the owner of the land charge and was noted on the land charge certificate accordingly. After obtaining the execution clause the defendant initiated execution proceedings. The company objected against the execution proceedings and argued that the clause in the bank’s general terms and conditions submitting the company immediately to execution proceedings was unfair and, therefore, void.

Decision

The German Federal Supreme Court held the general terms and conditions to be valid. The court argued in particular that the legislator had refrained from declaring such clauses void in the Risk Limitation Act (Risikobegrenzungsgesetz) which was enacted in view of the increase in non performing loan transactions.

However, the BGH also found that the notary publics shall grant to the new creditor an execution clause (Vollstreckungsklausel) only if this new creditor had previously entered into the security agreement. This requirement shall be examined ex officio.

Conclusion

The German Federal Supreme Court’s decision is generally positive as it confirms the many decades of practice of using pre-printed general terms and conditions submitting borrowers immediately to execution proceedings. However, it might prove to be disadvantageous to investors in non performing loans as far as the judgment requires them to enter into the security agreements underlying the respective land charges. Only after the reasoning of the judgment has been published it can be determined whether entering into the agreement is truly necessary or if an agreement between seller and purchaser of the loan portfolio obliging the purchaser to observe the provisions of the respective security agreements to the benefit of the borrower is sufficient. This question arises in particular with regard to land charges acquired until August 19, 2008. In case of land charges acquired after this date the purchaser is bound by the conditions of the respective security agreement pursuant to the new Risk Limitation Act, anyway. Therefore, in these cases the new requirement introduced by the Federal Supreme Court appears to be superfluous.

If the land charge creditor cannot prove entry into the security agreement by way of official certificates or agreements with officially certified signatures then the land charge creditor may be faced with delays in the granting of the execution clause. In any case, in the application proceedings for such clauses the notary publics will have to examine ex officio whether the new creditor has entered into the security agreement. This will render these application proceedings more complicated.

It can also be expected that in the future debtors will increasingly already take measures against the execution proceedings during the application proceedings for the execution clauses. Furthermore, it must be clarified whether the Federal Supreme Court’s reasoning is also applicable to abstract acknowledgements of indebtedness. In this the debtor also personally submits to the immediate execution with his/her entire assets up to the amount secured by the land charge. As these acknowledgements of indebtedness are certified in connection with the granting of the loan and the creation of the land charge the Court’s reasoning might be applied hereto as well.

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